June 7, 2010

Tax Evasion – The Most Frequently Charged Crime in Accounting

Tax Evasion – The Most Frequently Charged Crime in Accounting Tax & Business

Tax evasion has been defined as the intentional and illegal avoidance of paying mandatory taxes to the government. The Internal Revenue Code §7201 defines tax evasion as an attempted to evade or defeat tax. It is also one of the Federal’s most frequently charged crimes. Taxpayers guilty of tax evasion (a felony), will fined up to $100,000 and may possibly face imprisonment and other penalties.

The elements which must exist in order to pursue evasion charges include:

  1. The existence of a tax deficiency,
  2. An affirmative act constituting an evasion or attempted evasion of the tax,
  3. Willfulness.

In the 2007 court case, United States of America v. Michael Kyereme, Michael Kyereme, a Cisco employee, pled guilty to tax evasion as he filed a 2006 tax return with taxable income totaling $81,494 and claimed a refund of $4,034. The 2006 return failed to report an additional $1,242,483 in income, (which would have resulted in him owing $429,826) as a result of Mr. Kyereme defrauding Cisco by ordering replacement parts that weren’t needed for clients and then selling them on his own to pocket the money. While the main issue in the case was mail fraud, Kyereme was sentenced to 5 years in prison and fined $100,000; the maximum penalty for tax evasion.

In the above case, a tax deficiency was present as a result of the under reporting of the fraudulently obtained income and subsequent unpaid tax due. Once Mr. Kyereme omitted the income, he met the second requirement of an affirmative act constituting an evasion. The element of willfulness will explain the intent of tax evasion. Willfulness has been defined as the voluntary, intentional violation of a known legal duty. Mr. Kyereme knew that he was omitting this income therefore not paying taxes, proving willfulness.

Any defenses in an evasion case are all in an effort to prove that there was no willfulness to commit a tax crime. If a tax deficiency is found, there was definitely an act resulting in evasion of taxes. Therefore, the question in any case is if there was willfulness or any intent and some defenses in tax evasion are good faith misunderstandings or negligence. However, a taxpayer may try to claim that they unaware of the fact that they had to pay taxes; it is only a means of avoiding conviction. In the end, taxes are inevitable and cannot be evaded.

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